re sales pre 1941...so for 4 years we financed the whole war....russia included.
and what better why to get rid of surplus capacity and labor than to blow it up;
hey did not some one suggest recently we blow up a million houses.....
Pimco: Blow Up One Million Homes
July 28, 2008 1:58 PM by Robert Blumen | Other posts by Robert Blumen | Comments (17)
Bond fund manager Bill Gross of the giant fund family PIMCO writes in his recent commentary
Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again. That, however, is easier said than done. One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again. Absent that, he's not quite sure what to do, nor am I, with the exception of the next paragraph's proposal.
It's not entirely clear how serious Gross is but, taking him seriously for the moment, this is rather similar to programs actually carried out during the Great Depression to buy up agricultural products (such as pigs) and destroy them. The thinking at that time was that low prices caused the depression by lowering the purchasing power of sellers; so that, if prices of agricultural products could be raised, then the purchasing power of farmers would increase, they could buy more of other goods, and that would lift the economy out of its slump.
The flaw in this thinking is shown Say's law: supply of one kind of thing constitutes demand for other kinds of things. Reducing the supply of some goods, i.e. pigs, or homes, reduces the demand for other goods. For this reason, there can never be a general oversupply problem.
However, there can be insufficient demand for existing supply of a particular good to support a selling price above the cost of production because the good was produced out of proportion to demand for that thing in particular. This is the case we are facing right now with housing. Contrary to Gross, falling home prices are part of the solution, not part of the problem. The problem is not low home prices as such. The problem is that home prices were inflated out of proportion to real (i.e. funded) consumer demand by a combination of credit expansion, the activity of the GSE in purchasing home mortages, lower lending standards, and bogus ratings on securitized loans.
These factors resulted in more homes being produced than were really demanded by consumers, at the cost of fewer of other types of goods being produced. While it's true that the these homes were built because of artificial demand, now that they exist, they are certainly worth something to someone, and destroying them would only us even poorer than we would otherwise be when we get done paying for this mess.
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Comments (17)
Ron
Yes, how wonderfully compassionate...to decide that people shouldn't be allowed to pay lower prices for homes.
The irony would be hysterical were it not so sad. After decades of failed attempts by government to provide "affordable housing" they've finally succeeded, only now they want to blow up all the affordable housing!
Published: July 28, 2008 2:30 PM
Dennis
In addition to Robert's excellent analysis, I would add that fundamental changes need to be made in this country's monetary and banking policy so that artificially induced asset bubbles do not reoccur.
I am assuming that monetary/financial stability is considered a positive. Some finance practitioners view volatility (and the boom phase) as a chance to make money, and have little concern for the economic and ethical consequences, including the eventual resulting economic contraction, of the Fed's manipulation of money and credit.
Published: July 28, 2008 2:56 PM
magnus
After decades of failed attempts by government to provide "affordable housing" they've finally succeeded, only now they want to blow up all the affordable housing!
It's almost enough to make a fellow wonder if affordable housing was their true goal.
If not, then it's not a case of "irony" so much as "fraud."
Published: July 28, 2008 3:11 PM
Brad
One can only hope our financial leaders and their wise friends can safely and sanely lead us out of this mess........
Oh, nevermind.
On second thought, I think they might be onto something, we'll give them away to Bond Managers and their wise friends first. Then by all means carry on......
What gets me most is that he seems to understand that our money system since WWII has led to the "rancid" side effect of inflation, and ultimately is responsible for our hellacious bind we are now in, but that it was STILL necessary for capitalism to work. Socialist money management necessary for capitalism to work. Where did I leave my copy of 1984.....?
Published: July 28, 2008 3:13 PM
Larry N. Martin
Who says real estate never goes down?? It's subject to the same market forces as everything else.
Published: July 28, 2008 4:12 PM
Zlatko
I've read Bill Gross' commentary on a few other topics already, so it comes as no surprise to read another ridiculous proposal like this one. The previous thing I read by him was placing the blame on the finance industry for the subprime crisis and called for regulation of financial instruments, completely ignoring any role government might have had in the process.
Published: July 28, 2008 4:19 PM
magnus
If destroying unwanted houses is the preferred method of keeping the prices of (surviving) houses high, what do you think they would do to keep wages high?
Published: July 28, 2008 4:33 PM
Jeremy Wuitschick
Hmmm... Americans can all be more prosperous by destroying valuable American homes... I don't think this lunacy needs any further comment
Published: July 28, 2008 5:02 PM
Brian Gladish
Yet another confirmation that investment and/or business skills do not corelate with economic comprehension. Perot, Iacocca, Soros, Buffett and now Gross are the evidence.
Published: July 28, 2008 5:28 PM
BondDude
Gross owns a metric tonne of mortgage debt in his various funds, and he is, to be charitable, an attention whore. Even though I work in his field, I no longer can even force myself to read his stuff.
Published: July 28, 2008 6:28 PM
Walt D.
I'm not sure that Bill Gross is serious. In the past, cars, college tuition, and maxed-out credit cards were financed by taking out home equity loans based on inflated equity. The fact that this can no longer take place is bound to have a "negative" effect. This is where the Austrian School would disagree and call this a positive effect.
Reading through Bill Gross's article, he makes many good points. However, the idea that poor credit or credit fraud was the source of the problem is just not true. Even if an application had no income/no assets, it at least had a FICO score, and this was known to Moody's and S&P when they rated the securities. (There were only a handful of cases where people figured out how to game the FICO score to get a better rate.)
Bill Gross also calls for regulation of financial instruments. Isn't that what the SEC did? You can't securitize anything without filing with the SEC.
Published: July 28, 2008 7:23 PM
Jeremy
@magnus - Heh, that's great
@Brian - yup, and that's why you get convoluted theories like reflexivity or whatever Soros believes in instead of pure economics.
I've wondered many times how otherwise extremely intelligent people who understand business quite well (especially Buffett) don't understand the causes of business cycles or bubbles.
At least Buffett is smart enough to mostly stay out of dangerous investments and not make recommendations like razing a million homes to the ground.
If markets were allowed to adjust (that's a big if with the coming socialization of Fannie & Freddie), housing should become cheaper than it has been in a long, long time.
Published: July 28, 2008 9:29 PM
Vincent Poncet
Another guy of PIMCO is supporting governement backing of wall street assets on the ground of keynesian "paradox of thrift".
pimco.com
"For me, a simple concept brought this realization: the paradox of thrift. For those of you who might not recall, the paradox of thrift posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow.
This principle is part of a whole range of macroeconomic concepts under the label of the paradox of aggregation: what holds for the individual doesn’t necessarily hold for the community of individuals. Understanding this paradox is absolutely vital to understanding macroeconomics and even more so to understanding what is presently unfolding in global financial markets. "
As we could expect, PIMCO bought a lot of Fannie Mae / Freddie Mac bonds thanks to government backing.
smartmoney.com
"Pimco: Enthusiastically Buying Agency Mortgage Bonds July 18, 2008 |
